For the past 70 years, the United States has enjoyed a significant level of control and power over the international order. As a result, it has had the ability to influence that order and its accompanying norms. However, in recent years, the rise of China, as both an economic and political heavyweight, has threatened the United States’ dominance.
Consequently, the relationship between China and the United States has taken a turn for the worse. Recently, the two nations have been engaged in very public disputes on a variety of issues such as the imposition of economic sanctions by the Trump administration; the investigation into the origins of COVID-19; or the discussion surrounding the Uyghurs at the Human Rights Council. Other topics, however, such as multilateral development finance have been left out of the media spotlight. However, understanding the significance of multilateral development finance is critical to fully grasp the new Sino-American rivalry.
To understand why multilateral development finance – a sector of the international system often perceived to be apolitical – has transformed into a geopolitical arena, one has to rewind the clock and dive into the origins of the current international financial architecture.
An American-dominated system
Near the end of the Second World War, with most European countries’ economies in a state of ruin, the United States emerged relatively unharmed as one of two superpowers – the other being the Soviet Union. This allowed the United States to promote its own vision for a new world order within the Western sphere of influence, one that would eventually expand to encompass the whole world after the end of the Cold War.
The financial aspect of the international system was decided at the Bretton Woods Conference, which took place from July 1 to 22, 1944, in New Hampshire with the representatives of 44 Allied nations. At the Conference, a new institution was created that still exists today: the International Bank for Reconstruction and Development (IBRD). The IBRD’s mandate was to provide financial resources and policy expertise to countries working towards poverty reduction and sustainable development. Ultimately, its goal at the time was to help rebuild a war-torn postwar Europe. The IBRD would eventually become a part of what is today known as the World Bank (WB).
In the world of international finance, the IBRD is what is referred to as a multilateral development bank (MDB). An MDB is a bank chartered by two or more countries with the objective of encouraging economic development in developing nations. Unlike commercial banks, which are exclusively profit-motivated, MDBs focus on development goals rather than just profits. MDBs’ membership is open to nations from developed and developing countries alike, with a country’s eligibility to join depending on the relevance of its participation.
As the main architect of the new international financial system and its institutions, the United States secured a controlling stake in the IBRD. This meant that, in exchange for providing a significantly greater share of the financial capital required for its functioning than other countries, the United States secured the largest voting share on its Board of Directors, giving it substantial influence over policy. Such clout allows American funding priorities and preferences to dominate, which then allows it to shape the Bank’s overall behaviour. The United States currently provides 16.66% of the Bank’s capital and exercises 15.77% of the total voting power. For context, the next most influential country is Japan, a staunch American ally, with 7.81% and 7.41%, respectively.
In the decades after the conference, the IBRD has been joined by other MDBs, some with a regional focus, such as the Asian Development Bank (ADB), the Inter-American Development Bank (IDB), the European Bank for Reconstruction and Development (EBRD) or the African Development Bank (ADB); others with a thematic focus, such as the International Fund for Agricultural Development (IFAD) or the International Development Association (IDA). In most cases, when they are members, the United States and its allies are the top voting shareholders.
The rise of China
Ever since the introduction of market forces by Deng Xiaoping in 1978, China’s economy has been growing by roughly 10% in size every year. It currently sits in 2nd place behind the United States – overtaking Japan in 2010 – in the rankings of the world’s largest economies. China began joining the international financial system in the early 1980s, starting with the IBRD in 1980. Proportional with its economic weight, China has therefore sought an increased role in international financial institutions, including MDBs.
Nevertheless, China’s emerging financial and economic power is still not reflected in the current institutional framework. Even before it became the economic heavyweight it is nowadays, China advocated for better representation for developing countries throughout the Bretton Woods institutions. However, a series of factors have prevented this from occurring.
First, developed countries are anxious about diluting their voting power to accommodate a rising China. Second, lending countries’ are concerned about the conflict of interest created by borrowing countries gaining more voting power – in the case of the ADB, China is the largest borrower. Third, China’s soon-to-be graduation has proven to be a problematic issue to address – meaning that as an upper-middle-income country, it would no longer have access to assistance from MDBs. Fourth, China has repeatedly called for an increase in MDB capital to increase the number of hard infrastructure projects. Fifth, reforms regarding the distribution of voting power have been inadequate, merely reaffirming the dominance of rich countries. All of the above has led to frustration on the part of China with the current system.
This frustration with the traditional, Bretton Woods-initiated system for multilateral development finance, in addition to the bloated bureaucracy that plagues it, led Beijing to spearhead the creation of new institutions in the last decade. This led to the birth of the New Development Bank (NDB) in 2014 and the Asian Infrastructure Investment Bank (AIIB) in 2015.
In the case of the AIIB, China provides 30.77% of the capital and exercises 26.56% of the total voting power. This is enough for a veto on key aspects of the Bank’s structure, similar to Western-led development banks and mirroring the nature of the United States’ power within the World Bank. Headquartered in Beijing and headed by a Chinese national, the Bank’s creation addressed a legitimate need for infrastructure in Asia, one not fully addressed by other institutions. Nonetheless, some critics have labelled it as an attempt by China to challenge the ADB’s regional authority and the greater American-led international order.
For context, the ADB was founded in 1966 as a financial institution with a distinct Asian character. It was established to foster economic growth and cooperation, in what was at the time one of the poorest regions of the globe. Headquartered in Manila and historically headed by a Japanese national, the bank began financing projects in the areas of health, education, and physical infrastructure in the 1970s and 1980s. Japan, the de facto leader of the Bank, and the United States each provide 15.57% of the capital and exercise 12.75% of the total voting power, while China (who is also a member) only stands at 6.43% and 5.44% respectively.
A difference in priorities
It is worth noting that the AIIB has so far behaved like a traditional MDB by attracting a large number of countries to join its ranks. This points to the AIIB’s honest embrace of multilateralism and addresses in part the perception of the Bank as purely an instrument of Chinese influence. To the great displeasure of the United States and Japan, countries like the United Kingdom, France, Germany, and Canada have joined as non-regional members, dismissing American concerns about China’s hidden intentions.
Nonetheless, the uneasy co-existence of the AIIB and the ADB is representative of a broader competition for influence; one that pits a declining United States and its allies against a rising China in the world of multilateral development finance. A difference in priorities can help explain why each side seeks to secure influence.
For the United States and its allies, multilateral development finance has long been used to render the developing world “suitable” to Western economic interests. For good or for bad, Western-led MDBs have devoted significant resources to soft infrastructure in developing countries in the past decades. Initially known as the “Washington Consensus” – a mixture of policies favouring the free market and a reduction of state involvement in the economy – the Western approach has recently involved an emphasis on institutional development, promoting democracy, and protecting human rights. This is reflected in the practice of conditionality: traditional MDBs make financing conditional on certain social, environmental, and institutional safeguards being put in place. Specifically, the ADB introduced policy-based lending in 1978, allowing for loans to be made for institutional reforms, and conditionality in 1987.
For China, multilateral development finance was initially used to support its internal development efforts of the past few decades. With its newfound economic and financial power, Beijing now wants to spread its wings – and its influence. For example, the Belt and Road Initiative (BRI), unveiled in 2013 by President Xi Jinping, is a massive public infrastructure initiative aiming to connect Asia to Europe. It involves many investment and development projects, which nations along the initiative’s path can take part in.
Here, development finance takes on the role of an enabling force, facilitating the funding of BRI-affiliated projects in participating countries. With its exclusive focus on hard infrastructure, the AIIB is an institution destined to be a major part of that enabling force. The BRI and the AIIB are already linked through China’s new Multilateral Cooperation Center for Development Finance (MCDF).
On the one hand, China has always feared “interference in its internal affairs” by Western nations. This is a fear that the conditionality requirements of traditional MDBs come close to triggering, hence the exclusive focus on hard infrastructure, which usually has no conditions attached to it. Beijing also fears American diplomatic and economic encirclement as it tries to assert itself as the new superpower of Asia through the BRI. For China, the AIIB, therefore, offers both a way to advertise its development standards through an official multilateral institution and a guarantee that, as its signature foreign policy project, the BRI gets the funding it needs.
On the other hand, the United States and Japan fear China becoming its own economic pole of influence through the successful completion of the BRI. They are also concerned that China is creating a parallel system of international institutions outside of Western influence. Washington and Tokyo are also critical of the Chinese approach, which does not emphasize strengthening borrowing countries’ institutions and burdens them with unsustainable debt through BRI-affiliated projects. The ADB, therefore, stands as the sound, traditional option for countries wishing to access development finance.
In short, the two Asian multilateral development banks represent competing visions for multilateral development finance: an American and Japanese-led, soft infrastructure-willing ADB on one side, and a Chinese-led, hard infrastructure-focused AIIB on the other. Both are designed to prioritize the preferences of the great powers backing them, but neither do so in an explicit manner.
Potential for cooperation
However, not everything is marked by conflict. MDBs have their own personalities as standalone institutions and react strongly to the politicization of their affairs. While there was initial suspicion, the ADB community has since welcomed the creation of the AIIB. This is evidenced by the memorandum of understanding (MOU) signed by the two banks on shared interests and strategic cooperation.
Additionally, the connection between the AIIB and the BRI, as well as its status as a direct competitor to the ADB, have been somewhat overplayed. The very fact that over 60 countries have signed up as members would make it difficult for China to use the AIIB for its own objectives. So far, the Bank has also replicated rather than replaced current global norms surrounding multilateral development finance. Nonetheless, only the future will tell if the presence of two MDBs respectively influenced by rival great powers will lead to cooperation and turbocharged development or competition and mutual undermining.